Everything You Need to Know About Insurers: Life and Health

As an essential part of most American's financial lives, insurance plays a big role in the financial markets and can provide investors with an opportunity to retire comfortably. With our third foray into insurance, we'll take a close look that the Life and Health market, including some of it's biggest roles, biggest players, and biggest challenges.

The big difference
The products offered by insurers within their life and health divisions differ greatly from the ones in property and casualty, which we explored earlier. The main difference is that all of the products insure you -- your person -- and not physical property or some liability you may have.

This seems obvious, but the distinction has a huge impact on the insurers. For one, underwriting can be a much more difficult process. It's easy to determine the value of a home with an appraisal, but the value of a human life is far more challenging to quantify. We'll get into more of the challenges for insurers later.

The meaning of life and health (insurance)
Life insurance, on the other hand, provides the beneficiaries with financial relief that you may have provided prior to your passing. Though it shouldn't be considered a means to accumulate wealth, life insurance does allow you a way to achieve financial goals like leaving money for your child's education, donations to charity, and other financial aspirations that you may have had.

Health insurance, including both medical and accident coverage, are still largely offered as ways for consumers to lower their exposure to financial risks like a disease or injury. Likewise, long-term care policies allow policyholders to prepare for a longer life expectancy and the related medical care costs they might incur.

Good things come to those who wait
Since life insurance is often one of the first methods of planning for retirement and anticipated expenses, insurers often combine the life and health divisions with other retirement services. One of the most popular retirement products insurers offer are annuities. Often sought out by those nearing retirement age or those who are moderately risk-averse, annuities are long-term financial planning tools that provide you with an income stream.

The most popular are deferred annuities, where you would have a contract with the insurer stating that you'll make regular payments into the annuity, then at a later date, you're able to begin withdrawing from the account. The deferred annuity allows you to build wealth -- often with tax deferral as well -- and receive a steady income stream later in your life. There has been an ongoing debate over the benefits of annuities, but right now, insurers are experiencing a big demand.

The market and its players
With over $803 billion in annual premiums written -- by just the top 25 producers -- the L&H segment of the insurance industry is certainly a healthy one. Below are five of the National Association of Insurance Commissioners top listed companies:

Source: NAIC 2012 Top 25 L&H rankings.

There's just one exception to the list of insurance providers above, with most of them providing life, health, and retirement products to consumers -- Aflac currently doesn't reach into the retirement services realm, except to sell life insurance. The rest offer other services, including financial planning, that are not exclusively related to insurance.

Top challenge
One of the biggest problems insurers can face when providing either life insurance policies or retirement services is keeping attractive products profitable. While companies selling annuities have recently experienced higher demand, which both AIG and MetLife reported in their second-quarter earnings this year, they are still addressing problems with their product offerings.

In the past, annuities offered customers guaranteed benefits, whether it be a guaranteed amount of income per month, a guaranteed number of payments, or the like. With interest rates at such low levels, there's been a lot of pressure on the profitability of such offerings, which has caused a shift in annuities products. Many of the companies are moving away from any guarantees and including new restrictions or other product features that will boost the product's bottom line.

Two halves of a whole
Though they offer different solutions to different problems, both P&C and L&H insurance are profitable segments that benefit from huge markets. In our next installments of this series, we'll take a look at the players going on the road less traveled -- the specialists -- before touching on the important qualities you should be focusing on if you plan to invest in an insurer.